Thoughts and Trades

What they should do

2006-05-12T13:57:00.000-04:00

Last night I got a call from a client in New Zealand. He told me he was transferring his assets back home. The reason? Soon citizens of Australia and New Zealand will pay no capital gains taxes on any domestic investments. Then I thought, what if they did the same in the US? That would create significant incentive for domestic investment which will also help reduce the deficit, not to mention create more wealth for US citizens who invest in their country.

Why hasn't any politician proposed such a bill? I speculate that the politician who proposes such a bill will generate much goodwill.

The Present Value of a College Education

2006-02-02T14:20:00.000-05:00

They say a person who goes to college earns an average of $1 million more in their lifetime then a person who doesn't.

With a good college education costing $40,000 a yr, thats $160,000 for a degree. If the average person graduates at 21 and works untill 65, thats a working lifetime of 44 years. Well if you could invest every year at the rate of 4.5%, then the present value of that $1 million is $144,172.76, or put another way, $144,172.76 invested at 4.5% a yr would become $1 million. So it could be said that a college education costing $160,000 is fairly valued.

But what if you can invest at a rate greater then 4.5%?

At 6% the present value is $77,000 which is the returns of the average bond investor
At 9% the present value is $22,554 which is the returns of the average buy & hold stock investor
At 12% the present value is $6,829 which is the returns of a good mutual fund
At 15% the present value is $2,134 which is the returns of a good investor
At 20% the present value is $328 which is the returns of a great investor
At 30% the present value is $9.69 which is the returns of legends like Buffet & Gates (maybe this is why he dropped out of college)

Suddenly $160,000 for a degree is not looking so hot.

Growth vs Value

2006-01-13T18:27:00.000-05:00

Today I happened to get into a debate with someone from the value persuasion. After reading about some of his beliefs on value investing I felt compelled to opine on some of the spurious relationships he mentioned such as buying low p/e or below book value stocks will outperform the market.

His response was:

"In the short run the market is a voting machine (Google is sexy)

In the long run the market is a weighing machine (which has more weight? Berkshire or Google?)"

And then offered to make a value vs growth bet.

Well it just so happened that today the stars are aligned, because Google and Berkshire both closed with a market cap around $138 billion. So to answer his question, as of today they are equal weight.

For the sake of knowledge what better way to entertain the bet then to track the performance of Google (growth) vs Berkshire (value).

As of 01/13/2006:

Google closed at $466.25
BRK.A closed at $89,600.00

I will be tracking the performance of these two side by side, and will make updates as we observe new developments in both.

The Smartest Generation

2005-10-21T16:18:00.000-04:00

Common belief by older generations is that the current generation and generations to come are stupid, ignorant and lazy. I think there is a trend in effect right now that as it matures will nuture one of smartest generations in history.
Over the past 50 years people's main information source was the TV, before that it was radio, newspapers, books, spoken word. What all these share in common is that one source influenced the masses.
Along comes the internet. A source where the masses influence the masses. Unlike the previous mediums, this source interacts with it users. Maybe its true the average persons attention span has shrunk, but is that a bad thing? Whats the point spending hours searching through papers & books when you can get the same information in seconds via the information superhighway. One can interact with others, and when in doubt no longer has to stayed glued to the tube waiting to be spoon fed information. Its also the information arbitrator between the able and the not so able. Anyone with a link to the internet is on much nearer level playing field with someone with more extensive reasources more today then ever. I havent't quantified how much more productive the internet makes someone, but if I had to guess based on my own experiance I would say at least 3 fold.
To give an example of how disruptive the internet is, I continue to refer to google. They continue take ad revenue while the old men of the by gone days stand and scratch their heads, wondering how it makes that money. Its simple; google lets advertisers see the return on their ad dollars they are getting, while TV, radio and print doesn't. Advertising used to be alot of guesswork + trial and error, Google & overture (now owned by yahoo) turned it into a science.

Does Technical Analysis Work?

2005-10-02T15:31:00.000-04:00

This chart was taken from the most popular technical analysts website on a popular TA website.

If we break out to the upside he will just revise his chart to now show a bullish pattern instead of a bearish wedge.

We are now in a period of historically low volatility. I wonder if the low volatility will cause technical traders to take one position then be forced to take it in the other direction only to be stopped out again, when if they just held the original trade they would be profitable?

I think it would work better in a period of high volatility, but in the mean time I think mean revision trades can make a trader feel like he's coining money.

Negitive Sentiment

2005-07-07T19:38:00.000-04:00

6am est - Alarm goes off - "There have been explosions around London" said the voice on the radio. I thought I was still dreaming.

7am - Check the quotes and everything is inverted, dow & nasdaq futures down 140 & 22. Mood was somber, but I did not feel uneasy.

Sometime later - jobless claims not good.

4pm - Dow up 31, Nasdaq up 7

When you have a day where there is very bad news, so bad that no one would doubt the direction as to which the market will go, and just the opposite happens. Capitulation. When the sentiment is so negitive that everyone who wanted to sell has sold, there is no place for the market to go but up. That is what we witnessed today.

What is Google?

2005-05-31T13:01:00.000-04:00

What makes Google so special? Most can't believe advertising revenues alone justify it's current price. Advertising is a $600 Billion market, given that Google shows a better return on advertising dollars then any other model, why shouldn't adveristing dollars keep flowing to Google? If someone does happen to build a better wheel, here are some other things Google is working on:

• algorithms • artificial intelligence • compiler optimization • computer architecture • computer graphics • data compression • data mining • file system design • genetic algorithms • information retrieval • machine learning • natural language processing • operating systems • profiling • robotics • text processing • user interface design • web information retrieval

BEATS CASH

Shorts are hero's

2005-05-26T12:52:00.000-04:00

Ever since the dot com crash of 2000 there has been a big fascination with shorting. If you shorted the S&P at the peak and covered in 2002, you would have made 50% or 25% a year, and creamed the index... On paper. In reality interest rates were high, so the interest paid on the borrowed shares would have trimmed your profits by 10%+.

The case against shorting is that it is unamerican. That's non-sense, there is nothing more patriotic then realizing a company has a problem and selling ahead of the real sellers so you can create liquidity at the bottom. Studies have shown that shorted stocks outperform stocks not shorted. In that case why are there so few short sellers? Perhaps the chart below can explain.

     
Since inception in 1994 the short hedge fund index returned -19.27% or -1.87% per yr

The S&P returned 204% or 10.31% per yr during the same period.

The reason there are so few short sellers, is they went out of business.

If your sitting at a poker table and don't know who the Patsy is

2005-05-23T21:43:00.000-04:00

I keep hearing people express concern because they don't know where to invest their money. With interest rates being so low, bonds, CD's and savings pay just enough for a person to say..."Where should I put my money?".

So begins the search for the land of opportunity. They look at Europe and Latin America, only to discover they are in bad shape. China has growth, but unless you know what your getting into, your investing in a country where anything goes (including screwing investors) as long as it doesn't interfere with the government.

So, if your sitting at table and don't know who the patsy is... Your it! Look no further, your sitting on a gold mine and you don't know it. US STOCKS, there's no place like it. For all the problems the US has, its less, and more resilient then other countries. There is no place on earth without problems, there will always be problems, but you have to ask which economy can best absorb and deal with its problems.

The dollar has been going up, US treasuries are being bought to the point it is yielding 4%. Clearly foreigners are pouring their money into the US. Why would they buy US treasuries yielding a measly 4%, because there is no better place to put it.

US assets are safe, but there is only one US asset that will show a decent return for the next 6 months. US STOCKS.

The Big Four

2005-05-23T17:02:00.000-04:00

A collegue of mine inspired me to create an index of four stocks that we like. He refers to them as "The Big Four", named after the daily moves they make. These stocks are ANTP, BOOM, NGPS & FORD. Although they are in different industries, they all have things in common.

They show significant earnings growth.
There are no expectations of these companies, so they always surprise. A study shows companies which beat expectation continue to outperform for the next two years.
The have small market capitalization (less then 500MM) and floats (less then 10MM).

BLACK = BIG FOUR INDEX
RED   = S&P

The Republic of Georgia

2005-05-15T14:18:00.000-04:00

Much money has been lost in the new Russia thanks to the illusion of a place where free trade exists. Putin can call it whatever he likes, but the people can see the government is involved at every corner. There is no formal tax code, if someone wants to start a company they have to sit down with a tax minister and negotiate the terms. No wonder Yukos owed so much in back taxes, the tax minister can change how much a company owes in taxes at will. Now the Russian government is in the business of selling oil. Those who see Lukoil gas stations (Putin is part owner) popping up, should get the message, either you partner with the government or you won't have a business. Most of the other former soviet states are no better taking after mother Russia's lead.

The republic of Georgia has decided to break the cycle under the wing of their newly elected 36 year old president, Mikheil Saakashvili. The country is doing several things that no other former soviet state is doing.

The government is looking to make itself simpler and smaller; several government ministries will no long exist by 2007.
As of January 1, 2005 the new simplified tax code is in effect. It will no longer be a progressive tax, a flat tax has been implemented for simplicity and to prevent government corruption.

Being that so few countries around the world are taking such measures, I think Georgia will be an interesting experiment to watch. For the more daring less patient I think Georgia is a great investment right now. The nation is taking steps to allow people to trade freely, so you can expect capital from countries that burden trade around the world to flow into Georgia.

Finish this sequence

2005-05-13T10:50:00.000-04:00

So you wanna go against the big boys?

2005-05-12T11:09:00.000-04:00

You've read all the books on technical analysis. It makes it seem so easy. So you begin trading and realize that a profit is not so easy. The big boys have read all the books you have. They understand what the tech and daytraders look for. It is for this reason that big boys who want to unload a big chunk of stock, buy first, run the price past resistance, which attracts the daytraders to start buying and then unload their size on the all too willing technical traders. It is perhaps why many of these authors who were profitable decided to start writing for a living instead of trading. One thing very few of these market books do is provide a statistical analysis of their system over a wide sample. If someone says a profitable strategy is to buy 50% retracements, how about showing us how many such retracements there were in the past, and how many of them were profitable/losses, what the average profit/loss is, and if this works as well today as it has in the past.

Many daytraders think they can predict the market, outrunning the big boys. Unfortunately you can't see what the big boys are doing, but they can see you. The brokerages know who the daytraders are, and they very willing to tell their big commission payers (hedge funds) what positions they are in. The funds take positions against them knowing these traders either have stops that can be triggered or have to exit by the end of the day. If you think your too small to be noticed, often there are droves of others doing what you which makes it worthwhile for the big boys to target you. It is for this reason I rarely daytrade and I always choose my market carefully.

Often I see people try to trade the biggest markets out there. Choosing companies of the S&P 500. I think this is a mistake unless you are a long term investor (buy and hold). First off you have pension funds who are only allowed to buy companies in the S&P 500. They have multiple analysts per S&P company + pay lots of $ to other research firms, for an individual to have an advantage over them is slim. On top of that you have the mutual funds who try to outsmart the mammoth pension funds, and the hedge funds who try to outdo the mutual funds. The level of competition is intense.

I prefer to find the smaller cap growth companies. Many of these companies are too small in market cap to be traded by pension and mutual funds. You can find many that show earnings growth far superior to S&P 500 companies, which is a key factor in the price and multiple a stock trades at. Often these companies have very few shares outstanding, so when the big boys can start buying the stock, it will really move.

Stocks that go BOOM

2005-05-11T21:41:00.000-04:00

DYNAMIC MATERIALS (NasdaqSC:BOOM) specializes in explosion cladding,
say what?
Bonding metals using controlled explosions.
so what?
explosive cladding can marry two metals that can't be welded.
what's the point?
It's a cost-saver because it avoids the necessity of making a thicker wall of more expensive material.
Who needs it?
Petrochemical, refining, hydrometallurgy, aluminum, shipbuilding and energy industries.
Prove it!
Income from operations is up 306% and revenue increased 72%.
How about the competition?
Dynamic materials has 60% of the market share, next biggest play is Asahi Kasei in Japan.
Shouldn't DM be worried about Asahi Kasei?
If your a plant in New Jersey, would you rather have it shipped from PA or Japan?

Materials is an undervalued sector. If I had to pick one materials stock for a growth porfolio, BOOM would be it.

Lets talk strategy

2005-05-10T21:41:00.000-04:00

The S&P is currently at the same levels it was 1 year ago. I took out my pen and paper and did a little counting to see who has been running the trading days for the past year. One way to see who runs the market is to find the midpoint (high + low / 2) of a daily range. A close below the midpoint indicates the bears where in control by the close, a close above indicates the bulls controlled the session. It turns out that 44% of the trading days for past year were controlled by the bears. If done since the start of 2005, 48% of trading days were controlled by bears. What does this mean? Forces between the bulls and bears have been balanced in the past year to date.

The forward earnings for the S&P 500 is $74 per share according to Thompson. S&P closed today at 1166.22. The yield for the S&P comes out to 6.3% (74/1166.22). A good indicator of where interest rates will be 1 year from now is the 10 year treasury which currently yields 4.2%. This means the S&P has a 2.2% yield premium (6.3 - 4.2). In the past 25 years, every time the S&P yielded greater then 1% over the 10 year treasury, the S&P has showed a positive return in the next 12 months.

This is a market that over the next 12 months favors the patient bull. I think the best way to take advantage of the highly impatient bearish sentiment we find is to sell puts. Option premiums on puts are currently high. Selling puts allows you to collect that premium while the trendless market erodes the time premium from those who bought it from you. In a worst case senario the stock goes down into the money and you end up owning the stock. Given that the market is bullish bias for the next 12 months owning stock is not bad. GOOG & SHLD are both good stocks this strategy can be applied to.

Media misleading

2005-05-10T10:10:00.000-04:00

STOCKS PLUNGE TO LOWEST POINT SINCE ELECTION, GOLDMAN TARGETS OIL BETWEEN $50-$105, DOLLAR DEATH SPIRALS.

On 4/16 the NYTIMES (page 1) decided to talk about how bad stocks and the economy has gotten. Had you bought 1 unit of the S&P at the open the next trading day you would currently be up 2.4% on the index. I'd like to thank the NYTIMES for calling the bottom on 4/16, unfortunately for most readers, the article makes it sound like 4/15 was the beginning of the end and put its readers in a position to sell at the very bottom to willing buyers like myself.

Through the end of 2004 every major media outlet was pounding the table on the dollar going to sh*t. Had you bought 1 unit of the US dollar index on 12/31/2004 you would currently be up 5%. And what is the reason for this dollar bashing? The trade deficit has been the main argument (although I've heard everything from slowing jobs growth to a surplus of housekeeping maids in CT). Last I checked we had a deficit bigger then this back around 1984 (massive when adjusted for inflation). The 80's & 90s turned into one of the greatest bull markets of the 20th century. At the same time Japan has a surplus and they have been in a bear market since 1990. What do you expect when people just sit on cash and don't spend it.

In Japan there is a culture of shame, where if you fail at something you don't do it again to spare your family shame. So after people have lost money in the stock market and real estate, the Japanese decided to avoid anymore shame by staying in cash. Japan is an extreme but much of the world shares Japan's sentiment to a lesser degree. Luckily for the US we have no shame. If we fail, we get back up and try again. We know that goods and the fruits of people's efforts are worth more then the paper we trade for it. We rather own a home, car, stocks, bonds and have a stocked fridge, because these things hold more value then cash.

In the media there exists a tendency to turn to legacy. Whenever someone comes on TV and says we should do something, the reason to end all arguments is; "We should do it because that's what they do in Europe". Why should we do what Europe does? Why is what's good for Europe good for the US? What makes Europe the pinnacle of a healthy society? Europe currently has the highest unemployment levels since WWII.

Finally there is talk that if all these other things don't kill the US, oil prices will. First I'd like to say that oil prices where higher in the 70's. Even so Goldman comes out and says oil could go as high $105. 3 days later oil tops out around $60 and has recently closed below $50 which already makes the Goldman report wrong since $50 was the bottom of the range. Keep in mind two things. 1) Basic law of supply and demand is that as prices go higher there is more incentive to produce and less incentive to consume . 2) Goldman is the biggest trader of oil these days, how convenient it was for that report to come out on the last day of the quarter to prop up the value of the huge oil inventory Goldman holds.